Northern California, Looking Frothy

Some Northern California price metrics are looking frothy. Home price growth is strong, yet unsustainable. According to the Case-Shiller Home Price Index, San Francisco year-over-year single-family house price growth remained above 20 percent from March 2013 to March 2014. House price to household income ratios show that housing affordability has declined significantly in the region since 2011. The San Francisco Metropolitan Statistical Area (MSA) reading of 3.7 surpassed its long-run average for house price to income ratio in 2013, while the San Jose MSA was approaching its long-run average. However, these ratios remain below 2008 levels. We expect Northern California house price appreciation to begin moderating this year.

If 2013 was the year of tech IPOs, then 2014 is the year of high-valuations and uncertainty. A number of notable tech acquisitions occurred in early 2014 at above normal valuations. Reminiscent of the tech bubble of 1999-2001, investors and analysts are beginning to wonder how bubbly the tech sector has become. The Silicon Valley 150 saw a correction at the beginning of March, declining 15.2 percent before hitting its trough in April. But, companies are still sitting on a lot of cash, allowing for more acquisitions this year. Standard and Poor’s reported in April that 1,700 businesses increased their total cash and short-term investments by 11 percent in 2013, to a total of $1.53 trillion. The technology sector held about a third of all the cash and short term-investments.

Northern California labor markets continue to perform well. Year-over-year employment growth in the San Jose MSA has remained above 4 percent since June 2012. Most sectors have shown positive gains, particularly education and health services, which added over 18,000 jobs to the area in the 12 months ending in April. We expect gains in area employment to remain strong at around 3 percent in 2014.